The Old General Store

 

By Jackie

Econ 12

Extra Credit

Due 2-23-05

 

There is a small town, Selma, which is located just south of Fresno in the valley of California.  The population is small and mostly consists of farmers of the surrounding area.  Weather people are at the grocery story, going out to eat, or filling their car up with gas, they always see someone they know.  The people of Selma do not have a lot of money; they are just average farmers with good hearts.

            There is one general story in the town, Nelson’s Hardware.  The store seems to be a home for many farmers as they go in and out of the story many times a day.  The owner knows all those who come in and almost everyone has an account at the store.  In a sense, Ed, the owner of the general store has a monopoly in Selma since he is the only produce of such products.  He has the total market power, but still can’t force consumers to buy. 

            One day something big came to Selma, something that would change the world for farmers.  Wal Mart came in and built a massive store that carried everything from farm tools, to food, to fish, to bathroom room products, clothes, everything anyone could imagine.  From day one that they came in, Ed no longer had a monopoly.  There was competition in the market. 

            Because Wal Mart was such a large store, they were able to buy as mass quantities and sell at low prices.  Ed, on the other hand, was not as flexible.  He had not been over charging his customers before, but rather charging a price that gave him enough money to make some profit and feed his family.  Ed’s competition with Wal Mart was not a monopolistic competition because there was not product differentiation.  In fact, the two were selling the same product, but Wal Mart had a price advantage. 

            The good news for Ed was that there was customer loyalty.  The people of Selma have been going to the General Store for years; they were even going to Ed’s house for dinner.  They new that if they did not have the money on hand to buy something at that point if time, they could still take it and just pay later.  There was trust a friendship loyalty between the citizens of Selma and their service at the General Store.

            However, as said earlier, the farmers were not that wealthy and were trying to save every penny they could.  This made Wal Mart very attractive to them since the prices were cheaper.  But how could they do that to their good friend Ed?  Slowly and secretly, the farmers began to make their purchases from Wal Mart, since it was the product only cheaper.  It is only natural that they are drawn toward the cheaper prices.  Still, there were people who continued to only go the General Store because of Ed.

            Ed thought about advertising, seeing that Wal Mart had pricey adds all over the place.  There was no need for him to include useful information, such as price and location, because everyone already knew that about him.  He was not receiving any new products to advertise the existence of, like Wal Mart was.  Not only that, but he was selling the same brand as Wal Mart.  Therefore, he came to the conclusion, that for himself and the General Store, it would be a waste of money to advertise. 

            The market in Selma turned into an Oligopoly since there were only a few firms in the industry and the actions of one have an effect on the other.  It was a duopoly with the two sellers of identical hardware products.  I would be ideal for Ed if he could combine with Wal Mart to work together as monopolists, but that was something Wal Mart was willing to look into.

            As time went on, the two ended up engaging in a price war as they drove the prices down to marginal cost.  The poor farmers were forced to start shopping at Wal Mart because there wives wanted the money that they could be saving.  They couldn’t stop thinking about the possibilities of things they could buy with the money they’d be saving at Wal Mart.  Although some people stayed loyal, it was not enough.  Ed could not afford to drop his prices so low.  Wal Mart was able to drop their hardware goods and make up for it from other departments of the store.  Unfortunately, Ed had no choice but to close down.  This gave Wal Mart a monopoly in Selma and they were no longer in a price war.  It is a sad story for Ed, but the wives of the farmers enjoyed the extra money.